ICICI Prudential(I-Pru) is the largest Pvt Sector insurance player with a market share of 21.9% in the pvt sector and 11.3% share in the overall industry. The company had a persistency ratio of 82.5% and solvency ratio of 320%, one of the best in the industry.

Embedded Value reflects the value of existing & expected profit from past policies in force: I-Pru's FY16 Embedded Value (EV) was Rs. 13,939cr, comprising of Adjusted Net worth of Rs. 5,514cr and Value in Force of Existing business at Rs. 8,426cr. Since insurance is a long-term contract the cash inflow happens over multiple years, while a large part of the expenses occurs in the initial stage. So, Value in force is the value of future cash flows of all the policy in existence, discounted at Risk Free Rate.

Scope for improving VNB margin: The ability to growth new business premium (APE) and improve the margins on that, is another critical factor for valuing an insurance company, the resultant of which is called Value of New Business (VNB). I-Pru has been able to improve its net new business margins from 5.7% of the premium in FY15 to 8% in FY16. The margins are still low compared to others but what gives confidence is the increasing trend. While the APE grew by 9% in FY16 to Rs. 5,170, the VNB grew by 52.6% to Rs. 412cr, largely due to improved margins (backed by increasing business from pure protection plans). Further, assuming acquisition cost were reduced by 30% as per the management the VNB would have been Rs. 710cr for FY16.

Higher stickiness of clients & funds attracts high valuation for insurance companies: Customer stickiness in insurance business is normally higher than other financial services & hence the profitability is also high vis a vi others like AMC business. Another key positive what we observed is the ability to generate higher profit on a given AUM by insurance companies. On an AUM of Rs. 1.1 trillion, ICICI Prudential reported a PAT of Rs. 1,653cr in FY16.

The last deal of ICICI Prudential was done valuing the company at Rs. 32,500cr: ICICI Prudential had sold a 6% stake in Nov 2015, for Rs. 1,950cr, valuing the company at Rs. 32,500cr. While the IPO values the company at Rs. 47,870cr at the upper price band. While part of the rise in valuation can be due to the fact that the company has improved its persistency rates and the new business margins a lot could be attributed to expected future growth.

Valuations & View: At the price of band of Rs. 300-334 the issue is offered at 3.1x and 3.4x its reported FY16 EV. While the company has enough scope for business growth in the future, we believe the issue is fully priced in and hence we have a NEUTRAL rating on the issue.

Shares of ICICI BANK LTD. was last trading in BSE at Rs.267.55 as compared to the previous close of Rs. 270.65. The total number of shares traded during the day was 1811766 in over 9935 trades.

The stock hit an intraday high of Rs. 275.6 and intraday low of 266.4. The net turnover during the day was Rs. 489688594.

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